Chapter 3 - Basic Allowances
There are various basic allowances which everyone should use:
The nil-rate band
There is an exempt amount which is announced in each budget. For the tax year 2009/10 when this book was last updated, the allowance is £325,000.
This is an amount above which tax is paid, and it is paid at 40% on death (or in some situations during lifetime at 20%).
Every person has this allowance. Until October 2007, the allowance was not transferable between spouses. Until then, it was necessary to engage in some rather complicated planning using wills to use both nil-rate bands for a married couple. Now, on the second death, the unused portion of the first deceased’s nil-rate band is available. This only applies to married couples or to those in registered civil partnerships.
The transferable allowances are now retrospective where the second death took place after October 2007 – and so widows and widowers may re-acquire their deceased spouse’s allowance. As this transferable allowance is retrospective without limit, all widows and widowers should find out what happened on the death of their spouse and keep a good record. The longer this task is left the harder it will be to find the detail.
The limits for Capital Transfer Tax from 1975 to 1985, and the earlier allowances of Death Duty, are available on the HMRC website.
The annual gift allowance
The tax-free annual gift allowance is £3,000 per person per tax year. If the allowance is not used in one year it can be carried forward and used in the next – but only once. If you do not use this allowance in one year the maximum you can give away the next year is £6,000 and £3,000 a year thereafter. Your spouse can do the same so you could make a gift to him or her first, using the “inter-spouse” exemption (see below) and effectively double your allowance.
The small gift exemption
Everyone can give away any number of small £250 gifts. These are limited to one gift per recipient and they cannot be combined with any other exemption. You cannot give a larger sum and claim that the first £250 is exempt.
The “gift in consideration of marriage” exemption
Gifts can be made to the bride and groom on the occasion of marriage up to the following values:
- Parent £5,000
- Grandparent £2,500
- Between bride and groom £2,500
- Any other person £1,000
The inter-spouse exemption
All gifts between married couples are exempt from IHT provided that the person receiving the gift is domiciled in the UK. If the recipient is not domiciled in the UK the amount is limited (in 2009/10) to £55,000. There is no limit on transfers from a non-domiciled spouse to a UK domiciled spouse.
Note that “spouse” includes a registered civil partner. A spouse from whom you are legally (or habitually) separated may no longer qualify for the exemption.
There is no exemption for gifts between cohabiting couples beyond the annual and small gift exemptions.
Charitable gifts
Gifts to UK charities, some political parties (subject to restrictions) and gifts for heritage/national purposes are also exempt from Inheritance Tax. Gifts for national purposes include the National Trust, the British Museum, the National Gallery, any local authority, or university, and a number of other public institutions. Land given to a housing association is also an exempt transfer. The list of possibilities is extensive and you can ask HMRC for help.
For those with no beneficiaries these are ideal ways to ensure that you choose where 100% of your wealth goes.
